Chapter 13 bankruptcy is often misunderstood, because people think they will lose their entire paycheck or that they have to payback all of their creditors. In fact, chapter 13 is a flexible affordable debt repayment plan that has the added benefit of being overseen by the federal bankruptcy court. One of the main reasons for filing a chapter 13 is to either save your house from foreclosure or to protect valuable property. You can also use chapter 13 if you do not qualify for chapter 7.
Chapter 13 is centered around the chapter 13 plan of reorganization ("the plan"). The plan defines how long you will be in chapter 13 and how much your will pay each month. A chapter 13 plan can run up to five years. In a chapter 13 plan, you do not have to repay your creditors in full and your plan payment is based upon your income and expenses.
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The contents of the chapter 13 plan are defined by the chapter 13 means test. The means test is used to determine your disposable monthly income ("DMI"). The means test starts with your gross income averaged over the last six months. Then you deduct living expenses. Living expenses are based on IRS guideline ranges. You are also allowed to take deductions from your gross income based on mandatory income deductions like income tax, social security, Medicare, child support or alimony payments, and other mandatory deductions. Yu can also take deductions for payments on secured debts, payments on arrearages for secured debts, back taxes, and the costs of administering the plan. Once all of these deductions are made, you come out with a number at the end. This number is your DMI. The DMI number is the amount that you pay each month in the chapter 13. As you can see, the chapter 13 plan payment is only arrived at after making all of these deductions.
Chapter 13 is often used to stop a home foreclosure. This is because chapter 13 allows you to make up your missed payments over the life of your plan. If you have gone through a drop in income or an interruption in income, then you can use chapter 13 to get current on your mortgage. Similarly, if you have a piece of property that could be taken and sold in a chapter 7, you can file chapter 13 to protect that property and still get a bankruptcy discharge.
Chapter 13 can also be used to take of back taxes that cannot be discharged in chapter 7. If you have back taxes, it can be very difficult to get caught up, because of your other bills. In chapter 13, you can pay the back taxes ahead of other unsecured creditors. This means that your other unsecured creditors - like credit cards and medical bills - must take whatever is left over after the taxes are paid. This can significantly reduce the time it takes to pay your back taxes while taking of your other debts as well.
Chapter 13 is a powerful option for people who want to save a house from foreclosure, pay back taxes, protect valuable property, or who cannot file chapter 7. Because chapter 13 involves a repayment plan, and is therefore more involved than chapter 7, you should consult an experienced bankruptcy lawyer who can help you file chapter 13 and complete a successful chapter 13 plan.
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